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Social Security has more than a math problem

Jagadeesh Gokhale, senior economist, CATO Institute

As the country ponders its deepening fiscal crisis, the topic of Social Security comes up.

One economist has been studying the demographic trends of the United States, and what they mean for the future of Social Security.

Jagadeesh Gokhale is a senior economist with the Cato Institute and says there is a problem with the system and the way they input data.

"They track only the number of workers, or what I would call labor quantity, in making projections about future earnings, taxes, and figuring out how . . . Social Security's finances [will do] in the future."

In his opinion, the agency should also be keeping track of what he calls labor quality -- experienced workers.

"We have a large Baby Boom generation who are in their highest earnings and working stage of their life cycle. When they move out, they will be replaced by similarly experienced workers, but they won't be as large in number."

It works like a string of falling dominoes.

Since the Baby Boomer generation was so large, and the numbers of Gen X workers don't compare, a natural void of experienced workers will develop. The Gen X group won't be able to generate as much as the Baby Boomers did because of this fact, and leave a void for the generation behind them -- Gen Y. Thus, when Gen X reaches retirement age, there will be an even wider gap.

"Labor quality, one of the attributes of which is experience in the workforce, will not be as high as it is today. There are a lot of worker attributes that are associated with how productive they are. . . . There are a whole host of worker attributes that are associated with whether workers are more productive or less productive and, in the future, if those attributes that are associated with lower worker productivity predominate, then labor quality is not going to be as high."

So, apart from simply looking at the number of people set to retire, Gokhale explained that looking at the quality of the country's labor force in order to determine overall output. And output, of course, determines how much is available for Social Security payable taxes.

"Over the next 75 years, as you can imagine, Social Security depends on receiving revenues from workers and those avenues paid out as benefits to Social Security benefit recipients -- retirees, dependents, survivors and so on. Well, if labor quality declines, which means labor productivity declines . . . we'll have less revenue coming in [with] the population of beneficiaries becoming higher."

Gokhale says, because of this, he doesn't think the government's predictions about the financial stability of Social Security are accurate; he thinks they are worse than popular consensus would have the public believe.

"We need to tabkle this problem urgently, and the earlier we do it, the better because [if we do it earlier] we can spread the adjustment burden -- either we increase payroll taxes or we have to reduce benefit commitments. That adjustment will be spread over a larger number of people the earlier we do it, and therefore every person's burden will be smaller."